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Do you owe more on your mortgage loan than what your home is worth? If so, you’re far from alone. A growing number of U.S. homeowners are similarly underwater on their home loans. And this makes it especially difficult for financially strapped consumers to pay off their high-interest credit-card debt.
According to a recent report from real estate Web site Zillow, more than 28 percent of U.S. homeowners with mortgage loans owed more on these loans in the first quarter of 2011 than what their properties were worth.
This is bad news. During the first quarter of last year, 22 percent of homeowners had negative equity in their homes. It’s not surprising that the percentage of underwater owners jumped so high; Zillow also reported that home values across the country fell 8.2 percent from May of 2010 to May of 2011.
This is particularly bad news for homeowners with high credit-card debt. No longer can many of them rely on the equity in their homes to pay down this debt.
There’s a reason for this: Many homeowners no longer have any equity at all in their residences, as Zillow’s reports found.
During the housing boom, when home values were soaring, homeowners could tap into low-interest home-equity loans to pay down their credit-card debt. This made sound financial sense; most home equity loans or home equity lines of credit came with interest rates under 6 percent. That compares quite favorably with the 14 percent to 20 percent interest rates attached to many consumer credit cards.
It turns out, though, that the wealth U.S. residents held in their homes was pretty much illusory. As home prices have tumbled since late 2006, homeowners have watched in dismay as their home equity evaporated.
Say goodbye to those low-interest home-equity loans.
Today, homeowners have to pay down their credit-card debt the old-fashioned way: slowly.
If you’re facing a mountain of credit-card debt, don’t despair. Make sure to pay more than your required minimum payment every month. And only use your card for purchases that you can pay off in full at the end of the month. And whatever you do, don’t mail in a late payment. Late payments can send your already high purchase interest rate to a back-breaking 29 percent.
You might also be able to take out a new credit card that offers an introductory interest rate of 0 percent on new purchases and balance transfers for a year or more. If so, you can then transfer your high-interest debt to a card that won’t charge you any interest for a year or longer.
Just make sure to pay off this debt as steadily as you can; ideally, you want to pay off it off before your 0-percent introductory offer expires. And don’t use the 0-percent period as an excuse to run up even more credit-card debt.